The overnight session has so far been marked with one after another economic debacle out of Asia. First Japan announced that its Q3 GDP fell an annualized 3.5% in Q3, more than the 3.4% expected, the worst decline since last year's earthquake. The drivers were sliding exports and a collapse in consumer spending. The announcement brought on a barrage of platitudes by various Japanese officials who are shocked, shocked, that 32 years of Keynesian miracles have resulted in this horrifying outcome. Of course, everyone knows 33 years is the charm for Keynesian miracles. So much for the boosts from Japan's QE 8 aad QE 9: bring on QE 10. The pundits appear surprised now that Japan is back in a solid recession, which to us is quite surprising as well - does this mean that Japan ever exited the depression? Then China came out with an announcement that its credit growth plunged in October with Chinese banks extended CNY 505bn new yuan loans in October, down from CNY 623bn in September and less than the CNY 590 expected. The trifecta of bad news was rounded off by India, whose Industrial Production joined the rest of the world in global recession, when it dropped 0.4% in September on expectations of a 2.8% rise, even as Consumer prices rose 9.75% Y/Y - the global stagflation wave has arrived... For all those wondering why futures have managed to eek out a modest overnight ramp.
The balance of the news continues to follow every twist and turn in the endless Greek "will it be bailed out, won't it" saga, which today enters yet another irrelevant phase with the latest Eurogroup summit where nothing is expected to be resolved (everyone is still waiting for the Troika report). The final outcome will likely be the much delayed funding of the €31.5 billion tranche, but only after Germany pretends to kick and scream loudly and obstinately, only to comply behind the scenes. After all remember: the Greek "bailout" is really just a bailout of Deutsche Bank.
Finally, with Veteran's day in the US meaning only equities are open, expect another volumeless day, where due to the elimination of buffering checks and balances from bonds, equities can proceed with another major headfake ramp, only to be outdone one the rational traders return.
What to look forward to from Socgen:
Markets dealt with an abundance of political and event risk last week. However, the overhang from the US election and the perennial uncertainty over Greece will continue to cast a shadow over currencies and other markets this week with the yawning gap between EUR/USD spot and risk reversals set to experience a further squeeze. In G10 fx, for the JPY and AUD to share the top spot last week was a very rare occurrence indeed and begs the question whether these are now the dynamics that will determine where currencies trade over the closing stages of 2012. Who dares to say that the AUD is immune to risk aversion? The ECB, BoE and RBA all kept their benchmark rates unchanged last week which in theory should have favoured the EUR, GBP and AUD. In practice only the last of the three benefited and with the inflation data in China giving the PBoC room to ease, the AUD looks well placed to keep defying the more bearish consensus predictions. However, one could wonder how long the de-corrrelation from stocks can continue if the S&P does extend below the 200d ma.
Greece will stay under the spotlight given the expiry of an estimated EUR5bn of T-bills on Friday. The EU has pledged to tide Greece over but details are sketchy. From the standpoint where Athens passed another austerity bill last week, how does the EU argue that conditions do not yet warrant a release of the next bailout tranche? We will hear the answers directly from the Eurogroup today, but the plan to delay will not go down well with the public on the streets.
No key data at all to consider today, but we will hear from ECB member Knot and both France and Germany have bill auctions in the pipeline
We conclude, traditionally, with Jim Reid's nightly roundup:
Europe and Greece will likely be the immediate focus for markets this week but the latest fiscal cliff news will continue to be the main macro driver as the lame duck session starts early this week. In today’s EMR we will preview this week’s major events and data, update our usual earnings season performance table and also highlight a story that might just highlight a slow potential route towards future fuller government debt monetisation.
Starting with Europe, the passing of Greece’s 2013 budget vote was the main development overnight. The budget, which predicts a 5.2% fiscal deficit next year and also a 6th consecutive year of GDP contraction, received 167 votes in the 300-seat parliament. Approving the budget was a prerequisite to receiving Greece’s next tranche of funding but it does seem that a final decision to unlock those bailout funds might just take a little longer as recently hinted by German Finance Minister Schaeuble. Indeed it is unlikely that we’ll get definitive answers on this (as well as Cyprus’ aid agreement) at the two-day EU finance ministers meeting starting today. Our economists think that the December 3rd meeting now looks to be the likely point where decisions will be made. Nevertheless we will watch out for sound bites from the meeting today which starts at 4pm London time. For the record there are also other political meetings going on today. Monti will meet Hollande in Paris at 4pm London time. Merkel will meet the Portuguese PM and President today with a brief joint press event expected after the talks.
Staying on Greece, an upcoming EU5bn T-bill maturity this Friday (16th November) may start to attract some focus. To cover this upcoming maturity, the FT noted that Greece has announced plans to raise funds via a T-bill auction tomorrow. However, the FT noted that Greek banks can only buy about €3.5bn collateral acceptable to the ECB. This is because the ECB has not given permission for Greece to maintain a temporary €17bn ceiling for T-bill issuance due to be reduced this month to €12bn. To plug the shortfall, the FT wrote that Greece may seek to use funds from a €3bn reserve for bank recapitalisation held by the Hellenic Financial Stability Fund.
Given the amount of political and economic capital already extended to Greece, it’s highly unlikely that they’ll be left to default on a EU5bn T-bill this week. A solution is likely to be found. It helps that the two votes this past week have cleared Parliament. On the 2013 budget that was approved overnight, GDP is forecast to contract by -6.5% and -4.5% in 2012 and 2013 respectively while the Government debt to GDP ratio is expected to finish 2012 at 176% before rising to 189% next year. These numbers and Greece’s fiscal slippage have both been previewed by the media beforehand but it is clear that the debt-sustainability paper tabled at the EU summit back in February when Greece’s second bailout programme was approved now looks too optimistic. We recall that the ‘confidential’ debtsustainability paper projected a “baseline” scenario where Greece’s economy stops shrinking in 2013 and returns to +2.3% growth in 2014. In the “baseline” scenario, the debt/GDP ratio was expected to peak at 168% in 2013 before gradually falling to 129% in 2020. In a downside scenario the forecasted debt/GDP was to reach 162% and 171% in 2012 and 2013 before peaking at 178% in 2015 while GDP was projected to shrink by -4.8% this year and -1.0% in 2013. So we seem to be operating outside the worst case.
Away from the peripheral and turning our eyes to the UK, the Government last week agreed with the Bank of England to transfer to the Exchequer the excess cash held in the Bank’s Quantitative Easing (QE) facility. As a brief background, since 2009 the BoE has operated QE by buying gilts and holding them in a dedicated facility called the Asset Purchase Facility (APF). These gilts attract regular coupon payments from the Exchequer. With the purchases of the APF having reached £375 billion, this Facility has now accumulated a large cash balance. From now on this excess cash will be transferred to the Exchequer on a regular basis. Whilst this brings the UK’s practices in line with those of other major central banks like the Fed Reserve and the Bank of Japan it perhaps highlights a slow potential route towards future fuller monetisation.
Turning to markets the overnight session is mostly weaker as we type. Hong Kong (+0.1%) equities are faring better relative to bourses in China (-0.2%), Japan (-0.8%) and South Korea (-0.2%). Japan’s Q3 GDP (-3.5% v -3.4% annualised) came in largely in line with expectations while China’s trade balance ($31.99bn v $27.30bn) came in better than expected over the weekend largely driven by increases in exports to ASEAN. New Yuan loans data (505.2bn v 590.0bn) fell short of expectations though. Gold is paring back Friday’s trading declines as the precious metal is up modestly at $1735/oz overnight. The UST 10-year yield is unchanged at 1.606% while S&P 500 futures (+0.1%) are off the overnight lows as we go to print.
In other events this week we may see a rather quiet start to markets with Veterans Day affecting the US bond markets (although equity markets will trade as usual). Discussions between the Democrats and Republicans on the impending fiscal cliff also begin with Congress reconvening for the “lame duck” session today and tomorrow. Bernanke’s speech on the housing/mortgage market on Thursday in Atlanta is also noteworthy. Data flow will be light at the start of the week. On Wednesday, October PPI and retail sales are the main US releases along with the FOMC minutes. On Thursday we have CPI data together with the New York and Philly Fed surveys before Friday’s industrial production data. On the other side of the Atlantic, the data highlight will be the Eurozone/German/French/Italian/Spanish flash Q3 GDP estimates on Thursday. Ahead of that, we have the German ZEW survey on Tuesday and Eurozone IP on Wednesday. In the UK, CPI (Tues), unemployment (Wed) and retail sales (Thurs) are the main prints. Company reporting wise we have 63 Stoxx600 companies lined up including a number of Italian banks. On the political front, EU finance ministers meeting aside we also have Spain’s economy minister and Greek FM Stournaras speaking at the European Parliament’s economic affairs committee on the topic of “Exchange of views and economic dialogue” on Monday and Tuesday respectively. Merkel will also visit Portugal today and tomorrow. Major anti-austerity protests are scheduled in Spain, Portugal and Greece for midweek. In Asia the week-long National Party Congress in China concludes on Wednesday after which we should get more clarity on the make-up of the Politburo and key policy directions.